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CFA vs. Nurse B 911: Part I

An ex-classmate of mine is a CFA (certified financial advisor) with AGF Canada and we recently got into a mini-competition on mutual fund fundamentals as I was beginning to write my article on “Decisions on Mutual Funds.”

He’s a big advocate for “professional management” and I routinely give him a hard time when discussing how he might lose all his clients if he ever gave them just an hour with me. They have this section on their website titled “Why should I invest in a mutual fund”, with a list of benefits for investing in a mutual fund:

Professional Management – Your money is invested by experts (who charge you high fees)
Affordability – Start investing with as little as $500 or monthly contributions (we might not tell you about the fees)
Diversification – Your money is spread across many different investments (which all charge high fees)
Choice – You can choose from a wide variety of funds (but we’ll probably pick the ones that charge you the most fees)
Flexibility – Mutual funds can be bought and sold on any business day (we charge fees either when you buy or sell)

Joking Mark (haha). Seriously, he’ll get a kick out of reading that.

Mark’s contention has always been that a professional advisor can easily compensate for any and all costs that his clients endure and that the fees or costs of their investment should be the last concern they have. I on the other hand have contended for a long time that although costs are not the MOST important element of investing, over time they can have a dramatic effect on returns and should be included within the top 5 priorities when considering an investment.

What started it all was Mark’s belief (while only slightly intoxicated) that he could construct a portfolio of professional managed funds that would beat out any portfolio I constructed over a 3-year period.

Being someone who has never been one to back down from a competition – I issued a challenge. Neither of us wants to sit around for three years waiting, so we agreed that we would back-date the data using a globefund portfolio and track the results beginning as of January 2005. We agreed that we wouldn’t “cherry pick” any of the top funds just for performance sake and asset, sector & geographic allocation of the portfolio had to be agreed upon prior to the start. I also added an extra element by getting him to agree that we each would keep our portfolio constructed entirely within a single fund company: Fidelity, Templeton, Saxon, etc, knowing that he would pick his beloved AGF funds.

We picked a friend of ours as our “Portfolio Guy.” Although we could have used countless criteria or personal situations in order to demonstrate portfolio construction among the two of us, picking a general starting point was the easiest for in order to eliminate confusion and the constant bickering that might ensue.

Travis:
Twenty-eight, owns a small business in construction. RSP Value of $10,000 with limited knowledge of financial terms, securities, etc. He’s single, owns a small home with mortgage of $55,000 and before tax annual income of $60,000.

Agreement:

Asset Allocation:
Bonds: 25% (+/- 2%)
Stocks: 75% (+/- 2%)

Geographic Allocation:
Canada: 65% (+/- 2%)
US: 20% (+/- 2%)
Intl: 15% (+/- 2%)

Conditions:
– All entry purchases were made as of January 5th, 2005
– Competition Ends as of January 1st, 2008.
– Portfolio snapshot allowed as of June 30th, 2007
– Any and all front-end fees were to be included in the initial $10,000 invested among funds. DSC fees paid out at end of competition.
– No annual rebalancing (for the sake of backdating purposes)
– Calculation of Avg. MER as per Morningstar X-ray Tool
– Avg. MER as of May 31st, 2007 (when we started the bet) to be applied to all calculations: past, present & future
– Assumption: all funds held within an RSP for tax purposes
– Full disclosure of holdings when positions were initiated & we both get access to each other’s information to make sure there’s no cheating.

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{ 1 comment… add one }
  • Mark P June 21, 2007, 8:30 am

    Seriously guy, why do you have to be like this? No worries. I got you covered just fine with my port. Just don’t cry to mommy when you lose and owe me that 24 at xmas.

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